In India’s tax system, two critical mechanisms play a pivotal role in ensuring the timely collection of taxes and minimizing evasion: Tax Deducted at Source (TDS) and Tax Collected at Source (TCS). Although both serve the fundamental purpose of collecting taxes upfront, they operate in distinct contexts and have different applicabilities.
As an investor, you must understand the differences between TCS and TDS to stay compliant with tax concepts and manage your tax liabilities effectively.
What Is TDS?
TDS, or Tax Deducted at Source, is a means of collecting income tax in India. It plays a critical role in the government’s tax collection mechanism.
It is a method where a certain amount of money is deducted from the payment being made and directly deposited with the government by the payer on behalf of the payee at the time of the transaction.
For example, if you work as a freelancer and earn ₹60,000 for your services from XYZ Ltd., the organization deducts 10% as TDS and pays ₹54,000 to you. The TDS of ₹6,000 is directly deposited to the government by your organization. So, at the time of tax filing, you can claim the ₹6,000 TDS that has been deducted, and your actual liability will be reduced to an equal extent.
What Is TCS?
TCS, or Tax Collected at Source, is a tax the government of India levies, where the seller collects tax from the buyer at the time of sale. This system is managed by the Central Board of Direct Taxes (CBDT).
The primary purpose of TCS is to minimize tax evasion by collecting tax at the point of transaction. The rates at which TCS is collected can differ based on the nature of the goods or services being sold and are determined by the government.
Let us understand the difference between TCS and TDS in the below section.
Difference Between TDS and TCS
| Feature | TDS (Tax Deducted at Source) | TCS (Tax Collected at Source) |
| Nature | Tax is deducted when a payment is made from the income due to the recipient. | Tax collected by the seller from the buyer at the time of sale. |
| Purpose | To collect tax from the very source of income. | To collect tax from the buyer’s purchase of goods. |
| TDS Vs. TCS Applicability | Applicable on various payments such as salaries, interest, rent, professional fees, etc. | Mainly applicable to the sale of certain goods like liquor, forest produce, scrap, etc. |
| Responsibility | The payer (or employer) is responsible for deducting the tax before making the payment. | The seller (or collector) is responsible for collecting the tax from the buyer (or lessee). |
| TDS Vs. TCS Rate | The rates of TDS vary based on the nature of payment and the recipient’s status. For example, if you are considering long-term stocks to buy, the TDS on the gain will be 10%. | The rates of TCS vary based on the type of goods being sold. |
| Compliance Requirement | Deductors must file TDS returns and issue a certificate to the payee. | Collectors must file TCS returns and issue a certificate to the buyer. |
| Tax Credit | The deducted amount can be claimed as a tax credit by the payee against their total tax liability. | The collected amount can be claimed as a tax credit by the buyer against their total tax liability. |
| Penalties for Non-compliance | Failure to deduct or delay in payment of TDS can result in penalties and interest charges. | Failure to collect or delay in payment of TCS can result in penalties and interest charges. |
Examples of TCS Vs. TDS
Let us find out the difference between TDS and TCS with the example:
Example of TCS
Imagine a jewelry store, “Gemi,” sells a diamond necklace worth ₹2,00,000 to a customer, Priya. According to the Income Tax Act, certain sales, including the sale of jewelry exceeding a specified amount, are subject to TCS.
Let us assume the TCS rate on the sale of jewelry is 1%, “Gemi” will collect an additional ₹2,000 (1% of ₹2,00,000) as TCS from Priya at the time of sale.
Therefore, Priya will pay a total of ₹2,02,000 for the necklace. “Gemi” is then responsible for depositing the collected ₹2,000 with the government and must provide Priya with a TCS certificate, which indicates the amount of tax collected. Priya can use this certificate to claim the ₹2,000 as a tax credit against her total tax liability when she files her income tax return.
Example of TDS
Let’s consider an employee, A, who works for a company and earns a monthly salary of ₹50,000. According to the Income Tax Act, the employer is required to deduct tax at source from the employee’s salary based on the prevailing income tax slab rates before making the payment to A.
Say the TDS rate on A’s salary is 10%; the employer will deduct ₹5,000 as TDS each month from A’s salary. Therefore, A will receive a net salary of ₹45,000 after the TDS deduction. The employer is then obligated to deposit the ₹5,000 with the government on A’s behalf and provide A with a TDS certificate (Form 16), which details the amount deducted and deposited throughout the financial year.
Conclusion
Acknowledging the difference between TDS and TCS, with examples, is essential for understanding taxable income. It helps you make an informed decision about tax planning and investments.
Moreover, you can contact SEBI-registered advisory firms for better investment guidance and also enable you to save taxes.
What happens when you fail to collect or deposit tax?
Failure to collect or deposit tax results in penalties, interest charges, and potential legal action, as required by tax laws.
Can TCS be adjusted against TDS?
TCS cannot be directly adjusted against TDS as they serve different purposes in tax collection.
Is TCS refundable?
Yes, TCS is refundable if the amount collected exceeds the tax liability of the seller.
What are TCS VS TDS Under GST?
In the e-commerce sector, TCS is the tax collected by e-commerce operators from sales made through their platforms, where they also collect the payment. TDS is the tax deducted by the buyer, like government departments, during payments for business contracts.
Sections 52 and 51 of the CGST Act cover the provisions of TCS Vs. TDS under GST.
I’m Archana R. Chettiar, an experienced content creator with
an affinity for writing on personal finance and other financial content. I
love to write on equity investing, retirement, managing money, and more.